The market is currently at an extremely precarious and fragmented juncture.
Tracking data reveals that since 2023, global major asset pricing has entered a new "fiscal dominance" phase, where traditional macroeconomic transmission logic has largely broken down. The market exhibits a sharp "K-shaped divergence": U.S. stocks continue to rise despite employment slowdowns, gold hits record highs amid elevated real interest rates, and "fiscal risk premiums" are broadly embedded across asset classes.
The core risk stems not from the economic cycle itself but from temporarily concealed fiscal pressures. Estimates suggest the current system implies an interest rate gap as wide as 600 basis points (bp). Before macroeconomic instability emerges, fiscal risks are temporarily masked by gold's extreme rally. Future mitigation of this tension will likely hinge on a path of "gold declining, copper rising, and interest rates falling."
This means investors must monitor the relative movements of gold, copper, and interest rates as key indicators of systemic risk unwinding. Asset prices already reflect a "dual consistency" structure: on one hand, U.S. stocks and gold jointly hedge fiat currency credit risks; on the other, the mild divergence between equities and bonds reflects the costs and benefits of fiscal expansion.
**The Collapse of the Old Order: A Paradigm Shift in Post-2023 Pricing** Since 2023, the market has completely shattered the 2000–2022 pricing framework. Traditional macroeconomic anchors have failed:
1. **U.S. Stocks Decouple from the Economy**: The S&P 500 keeps hitting new highs despite declining job openings (JOLTS), showing market desensitization to recession signals. 2. **Gold Decouples from Interest Rates**: Gold ignores the drag of high real rates, even diverging from TIPS (Treasury Inflation-Protected Securities). 3. **Copper Decouples from Inflation**: As a proxy for inflation expectations, copper no longer tracks traditional inflation logic.
This divergence is not temporary noise but a fundamental shift in market pricing—from "economic fundamentals and monetary cycles" to "debt sustainability and fiscal risks." Every asset class now incorporates a steep "fiscal risk premium."
**Quantifying the Madness: Extreme Deviations Up to 400%** Data reveals stark distortions when tested against legacy models:
- **U.S. Stocks vs. Rates**: Both deviate from old models by 140%–170%. - **Gold**: Shows the most extreme "unanchored" behavior, with deviations exceeding 400%. - **Copper**: Relatively moderate at ~44%.
The findings underscore a critical insight: in the early stages of fiscal dominance, U.S. fiscal risk premiums are primarily priced through gold’s surge rather than nominal rates. Gold alone bears the burden of hedging dollar-denominated credit risks.
**The Hidden 600bp Gap and Interest Rate Models** Breaking down rates as functions of gold (implied TIPS) and copper (implied inflation expectations) uncovers a staggering gap:
- **Model Estimates**: Since 2022, nominal rates have deviated from "gold-copper implied rates" by up to 660bp. - **Mechanism**: A $1 gold rise implies a 0.2bp rate drop (higher fiscal risk premium), while a $1 copper rise offsets just 0.0225bp. - **Conclusion**: Even without surging Treasury yields, fiscal risks are already extreme. Current rates are artificially high relative to gold’s pricing. Future tension relief mathematically requires either gold falling, copper rising, or rates plunging.
**A "Parallel Universe" in Gold Terms: U.S. Stocks as Gold Proxies** Viewed through a "gold standard" lens, the world regains coherence:
- **Rational U.S. Stocks**: Gold-denominated equities (stock/gold ratio) realign with employment data (R²=77%). - **Dual Consistency**: Both U.S. stocks and gold show ~430% deviations from TIPS models, confirming equities’ evolution into "gold-like" hedges against fiat debasement—especially tech stocks as long-duration fiscal risk hedges. - **Equity-Bond Balance**: A ~150% divergence reflects fiscal expansion’s cost (borne by bonds) and nominal profit benefits (enjoyed by stocks).
**Three Future Scenarios** The embedded fiscal risk premium won’t vanish—it will merely shift across assets. Possible paths include:
1. **Mild Recovery (Near-Term Likely)**: Markets cling to the "gold standard" illusion. If inflation stays subdued, AI narratives buoy stocks, and gold-equities-rates divergence persists, copper’s catch-up could repair the gap. 2. **Inflation Spiral (Political Shock)**: Political pressures (e.g., tariff rebates under fiscal strain) reignite inflation, forcing fiscal risks into the open—triggering rate spikes, dollar weakness, higher gold prices, and risk-asset selloffs. 3. **Recession Liquidation (Liquidity Crisis)**: Deteriorating jobs data sparks recession trades, mimicking yen carry reversals. But fiscal dominance limits bonds’ safe-haven appeal, capping rate declines and potentially crushing both stocks and commodities.
Notably, the dollar’s strength reflects "least ugly" dynamics—non-U.S. economies (e.g., France, UK) face earlier fiscal reckoning—rather than U.S. fiscal health.
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